South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Argentina Forcefully Nationalized Retirement Accounts In 2008
Appendix I: Will Retirement Accounts Be Forcibly Nationalized?
This was the original question that I wanted to explore in this Scenario: What would happen if private retirement accounts were forcibly converted to Treasury bonds?
As you can see, this is not something I’m covering in any great detail—because as soon as I started looking at the issue, I realized it was simply not a realistic scenario.
Forcible conversion of private retirement accounts into sovereign national debt has happened very few times, most notably in Argentina in 2008.
In that event, the Argentine government found itself with a cash shortfall, and an inability to raise money through the sovereign debt markets. Argentine debt—rightly—was considered nuclear-waste-toxic.
So the Argentine government simply ordered all the banks and financial institutions to seize the private retirement accounts, and swap all the assets in those accounts for Argentine sovereign bonds, the swap carried out at face value. The Argentine government then took those assets, sold them, and thereby raised cash to pay its bills. (Considering the systemic corruption in Argentina, at least a third of that money was skimmed by crony government bureaucrats and crooked politicians.)
Of course, the Argentine bonds that people received for the assets they had had were not worth 100¢ on the peso—and on top of that, the Argentines shortly thereafter devalued the peso by about a third.
So this maneuver amounted to a theft of the people’s retirement monies by the Argentine government.
Could such a thing happen in the United States?
In a word, no.
Why not? Because of several reasons.
Number one, Argentina (and other countries in similar circumstances) could not simply issue bonds and have their central bank print money so as to have the cash to pay its bills—there would have been an instant and catastrophic collapse in the value of the Argentine peso if they had done that. This sort of money-printing has happened before—and several times—in Argentina’s checkered history, and so the people were prepared for it, in case it happened.
By comparison, in the United States, where the people do not have experience with the effects of money printing, the Federal Reserve printed $600 billion worth of paper, and essentially covered about a third to half of the U.S.’s budget deficit (depending on how you measure it; see here for a detailed discussion)—
—which is to say, they printed at least a third of the U.S. Federal government deficit—
—and there was no dollar-panic. Investors and the Ordinary Joe did not flee the dollar. Thus the very fact that the dollar is a fiat currency played in its favor: The market sentiment did not view the Fed’s QE-II policy as a devaluation (which is what it was)—so there was no panic.
Number two, if American authorities ever tried to forcibly and overtly nationalize people’s private retirement accounts, there would be a political tsunami—because in the States, there are only two parties.
In multi-party countries—which is to say, just about every other country on earth—the various political parties would all have different opinions. And so the political opposition to such a forced conversion of is difuse.
But in America, since there are only two parties, whatever the party in power does, the party out of power essentially opposes it. Thus the opposition party—be it Democrat or Republican—would make political hay of this forced nationalization. The party in power—that is, the party that would be pushing this policy—would realize that forcibly nationalizing and converting private retirement accounts into Treasury bonds would be politically suicidal. And of course, they would realize how obviously suicidal this policy is before they would implement it.
And finally, number three, the American government is already doing this: Worker contributions to Social Security are going into the famed “lock-box” . . . but then the Treasury is issuing non-interest bearing notes called “intragovernmental debt”, and essentially taking the cash that’s supposed to be in the Social Security lock-box and spending it on near-term government items.
Thus there is no real reason for the U.S. Federal government to forcibly nationalize private retirement accounts and convert them into Treasury bonds—while there are plenty of reasons that would discourage such a possibility.
So anyone saying it will happen is trying to get you all riled up—or trying to sell you snake oil. This issue simply will not happen.